Analysis of the fundamental predictability of prices in the British balancing market

Bunn, D W, Inekwe, J N and MacGeehan, D (2021) Analysis of the fundamental predictability of prices in the British balancing market. IEEE Transactions on Power Systems, 36 (2). pp. 1309-1316. ISSN 0885-8950

Abstract

This research analyses the non-linear and complex effects of drivers of system imbalance prices in the GB electricity market. Unlike day-ahead prices, the balancing settlement prices are comparatively under-researched, yet their importance is growing with greater market risks. The fundamental drivers of these prices are analysed over 2016-2019. The result of a nonlinear modelling approach reveals that system imbalance price exhibits a regime-switching behaviour, driven by weather and demand forecast errors, as well as other system effects. Surprisingly, balancing prices are predictable out of sample and a regime switching specification is more accurate than a linear model for prediction.